Monday, May 12, 2014

Discount factor is close to 1.0, but all the rates are annualized and usually between 0.1% ~ 8%.

This simple fact is often lost in the abstract math notations. When I get a long formula with lots of discount factors, forward rates, (forward) Libor rates, floating payments, future fixed payments... I often substitute typical numbers into the formula.

Also, due to annualizing, the rate number for overnight vs long tenors (like 1Y) are similiar, at least the same order of magnitude.